The UK is expected to make some major tax changes in the coming year to ostensibly fill the budget “black hole.” The new Labour government has messaged its intent to levy a higher tax on capital gains and remove the so-called “non-dom” status, which allows citizens to not pay income taxes in the UK if their primary home is outside the country. Labour has said it will eliminate the tax benefit while adding foreign earnings to the tax system.
Some members of the innovation sector have voiced their concerns that tax changes will do more harm than good. The UK tax system is already rated 30th in tax competitiveness, far behind many other European countries and the US (18th).
The Telegraph reports that Revolut co-founder and CTO Vlad Yatsenko says their employees benefit from lower taxes (and better weather) elsewhere as they have embraced remote work.
Yatsenko is quoted as explaining:
“Now the UK competes with Southern Europe. Before, younger people who wanted to build their careers would go to London. But these days, people are going [to Southern Europe] because they are attracted by better financial rewards, incentives from tax authorities and the lifestyle.”
He is not alone, as other reports indicate that the very wealthy are looking elsewhere as the UK becomes less welcoming. A separate article published by the Telegraph claims that over 6,000 millionaires will exit the UK and spend their money (along with their taxes) elsewhere—with Italy luring some of these individuals. Last August, Italy doubled its flat tax on foreign-sourced income for new residents from €100,000 to €200,000, but this increase is not expected to deter the affluent as taxes may be higher elsewhere, and quality of life is important too.
The Laffer Curve is a theory that claims higher taxes do not necessarily increase a comparative gain in tax revenue. At a certain point, people will “vote with their feet” and make rational decisions to improve their position and seek out more advantageous locales – or simply alter activities to lower their taxes. Higher taxes can also be a powerful disincentive for innovators and the affluent. At the same time, more public spending can crowd out private investment and public spending by default is less efficient.
Still, the UK is a popular location for entrepreneurship – especially in the Fintech realm, due to rule of law, quality of life and a top financial hub. But no country can take established positions for granted as capital is fungible and other jurisdictions adapt and change to compete with their neighbors.